Enhanced Forecasting of Equity Fund Returns Using Machine Learning

This paper aims to explore the integration of machine learning with risk and return performance measures, to provide a data-driven approach to identifying opportunities in equity funds. We built a dataset with 72 performance measures in the columns calculated for multiple periods ranging from 1 to 120 months. By shifting the values in the 1- and 3-month return columns, we created two new columns, aligning the data for the month t with the return for the month t+1. We categorized each row into one of three classes based on the mean and standard deviation of the shifted 1- and 3-month returns during the period. Based on cross-validated accuracy, we focused on the top three classifiers. As a result, the developed models achieved accuracy, recall, and precision values exceeding 0.92 on the test data. In addition, models trained on 1 year of data maintained predictive reliability for up to 2 months into the future, achieving precision above 90% in forecasting funds with 3-month returns above the average. Thus, this study highlights the effectiveness of machine learning in financial forecasting, particularly within the environment of the Brazilian equity market.